Mistakes Have Been Made & Lessons Have Been Learned

I’ve been writing this blog for almost 4 years. I’ve learned a lot in that time. I have learned much more than I probably learned in the previous 20 years of following markets.

Writing about investing and talking to people about investing have helped me tremendously.

Some of the key things I’ve learned:

I Can’t Predict Macro

Anyone following this blog knows that I tried really hard to predict the macroeconomy.

This was important to me because I knew that value would outperform from the bottom of an economic cycle. I overestimated my ability to do this. The COVID meltdown and recovery (unemployment has gone down to 8%, which I couldn’t have imagined in April) makes me question my ability to predict this stuff.

What looked easy to predict looking back on history isn’t so easy in reality.

I spent three years waiting for the great crash to come that I thought was inevitable. When the yield curve inverted, I thought it was a fat pitch. CAPE at all time highs, a recession on the horizon – we’re going to have at least a 50% decline like 2000-03 or 1973-74.

The thing is, every cycle is different. I can study history, but the notion that I can predict things based on my study of history is a fool’s errand.

I should have ignored all that. I should have looked at high quality companies trading for dumb multiples in March and bought them. It doesn’t matter what the CAPE ratio is. What matters is what *I* own, not what’s in the index and how crazy it is. I should have listened to the advice of people like Peter Lynch and just ignored it.

And, instead of trying to predict the next recession and turnaround, I could have just bought and held sound value and waited. No one knows.

I Didn’t Think Like a Business Owner

I really bought in to the quant school of thinking. Nobody knows anything. You can’t predict the future of a business. (Ironically, I thought it was hard to predict the future of an individual business but thought I could predict the macroeconomy). Just buy quantitatively cheap stocks. Churn the portfolio. Sell a stock when it pops.

I no longer think this is the right approach. Business analysis is something that people can do. With a little common sense, I could have realized that my investments in tire companies and GameStop weren’t good investments. I should have realized that my theses around these positions were a stretch.

The quant school seems like a natural extension of the efficient market hypothesis. True value investing should be a rejection of this hypothesis. If Ben Graham and Warren Buffett taught us anything, it’s that thinking about an investment as an owner can yield good results.

It’s not worth buying a stock if you aren’t willing to buy the business in its entirety and hold onto it for 10 years if you have to. If the thesis is “a miracle will happen, the multiple will go up, and then I’ll sell it for a 50% pop,” then that’s probably not a long-term winning approach.

If you’re buying individual stocks, you have to have conviction in your holdings. You have to have enough conviction where you’ll hold when something goes wrong.

It’s probably a bad idea to buy into a business where you sweat before you read the latest K or Q. It’s not worth the aggravation and the lack of conviction will hurt results.

My Risk Tolerance Is Lower Than I Thought

I moved my entire 401(k) into the S&P 500 in March 2009. I told my family to do the same. I also told them to get out in 2006-07. This gave me the impression that I could accurately identify bottoms and tops in the stock market.

March 2020 turned out differently for me.

If I wanted to lie to myself, I could tell myself the comfortable lie that unpredictable events outside of my analysis changed things – but was it really unpredictable that the Fed wouldn’t let the global financial system unravel?

The uncomfortable truth, I think, is that I felt pain and I reacted to that pain. I made a behavioral error. It was probably because I have a lot more money than I did in 2009 and was looking at some rather scary losses. It was easy to say “stay the course” when I had a small sum in a 401(k) after working a couple years. It was a completely different experience after toiling a decade and saving a large amount of money and seeing a lot of it wiped out.

I was fortunate that I developed the Weird Portfolio prior to the crash. I built that portfolio so it could withstand an equity crash and I behaved correctly when it happened with that portfolio.

With this “enterprising” account that I track on the blog, I did not behave correctly. To try to fix this error, I’m going to try to own better companies. I don’t want to own companies where I need obsess over what the next gyration of the economy will be. I’m hoping that owning companies I have conviction in and are higher quality will help me behave better the next time this happens.

Pounding Predictions of Doom Into My Head Wasn’t Productive

Bearish predictions of doom generate clicks and ratings. I thought I was emotionally intelligent enough not to be swayed by them and rationally evaluate them.

But, I think constantly pounding that stuff into my brain didn’t do me any good. A constant reading of bearish articles and listening to bearish podcasts didn’t help me.

The thing is – bearish predictions of doom always sound smarter than optimistic takes. The idea that the Fed is going to destroy the dollar, cause hyperinflation, and that we’re in a debt bubble that will cause Great Depression 2 seems compelling to me.

Is it, though?

If these smart guys can really predict Great Depression 2, why couldn’t they have also predicted the bubble that would precede Great Depression 2 and trade that? How many of them have been saying the same thing for 20 years?

Maybe we’ll have another Great Depression. I don’t know. I don’t think these guys do, either. I might as well own a company at a sound valuation that could survive the flood if it happened. For the defensive portfolio, I might as well own something balanced and that will minimize my losses in the worst case scenario. Worrying all the time about the second Great Depression and the thousand year flood seems like a fruitless & miserable effort. Maybe it will happen, but no one really knows.

It seems to me like it’s best to have a portfolio with elements that can survive any economic outcome, which is what the weird portfolio accomplishes.

For this portfolio that I track on the blog, I might as well own companies that I’m confident could survive an economic catastrophe. I don’t want a company in my portfolio that is completely dependent upon a change in the season or the continuation of spring. If I wouldn’t own the business for 10 years or think it could survive a Depression, then I probably shouldn’t own it at all.

If I invest for the rest of my life like the Great Depression and dollar devaluation is going to happen tomorrow, I’ll condemn myself to poor results.

Better to have a plan for the worst and hope for the best.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.